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As promised, I’m going to post one of the half-written articles that I have lieing around my harddrive somewhere. Today’s article is about AOL’s acquisition of the Huffington Post. I think this is actually one of the biggest stories in politics and in the social media space, but its gotten very little publicity. (The other big story in the social media space, aside from the fact Facebook is heading towards a 2011-2012 IPO is that Linkedin is also heading for an IPO even sooner – another little known fact).

The following article was written when I flew from Hong Kong to Sydney, so it is dated. In fact, my only sources were the NYT, the Economist and the Financial Times which Singapore Airlines provided me lol. It tackles the issue from a business POV, I hope to write a more thorough blog on the political and social media ramifications of the deal later. After all, Huffington Post is one of the most visited sites in the world (and I believe the most popular news site in the world, ranking ahead of the NYTs). What happens when the Huffington Post, whose quality control standards are already notoriously low, is acquired by a major corporation like AOL? What happens when the Huffington Post, whose sensationalist tactics to lure viewers into its website are already rock bottom is forced to go even lower to match the ridiculous growth forecasts it has set for itself? This has serious ramifications for US politics and for the respectability of political blogs in the social media discourse.

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Anyway, here is the original article:

AOL has just acquired the Huffington Post. As many of you are not familiar with the historical and financial aspects of this deal (or of the tech industry) I shall endeavour to provide a brief overview. It may, of course, be wrong. I’ve never had to deal with tech companies before and they are valued quite differently to bricks and mortar companies.

AOL has been active in the M&A field in the past. In fact, AOL’s acquisition of Time Warner is the textbook example of how a merger can destroy shareholder value rather than creating value – in that it is literally the example most textbooks use. AOL paid $150b (in shares) for Time Warner in what was to be the media marriage of the decade.

AOL, back in 2000 was primarily a provider of dial-up internet services, piggybacking its website(s), a few services (like AIM and AOL email). It’s business model was to funnel all those subscribers onto its website and then earn money from online ads. To do this, that website required strong content that would draw viewers to come back again and again. Time Warner was a company simply brimming with ‘content’, ie online news and entertainment. The rationale is not hard to see – AOL is a business that needs to generate more content to attract more ad revenues, and Time Warner had plenty of content.

Unfortunately, none of those predicted synergies ever eventuated, the merger went haywire for all sorts of reasons. Two years later, in 2002, AOL Time Warner made the biggest loss of any corporation to date US$99b. Things got so bad that in 2003, the AOL Time Warner conglomerate was renamed simply Time Warner. In 2009, Time Warner spun off its former acquirer, AOL as a separate company. Oops.

What’s shocking is that ten years later, AOL is still primarily dial-up internet provider (!!) and is still attempting to expand its content empire. Who even uses dial-up internet? Apparently 38 million poor sods living in the most technologically advanced nation on Earth. AOL made US$1.02b in revenues from its dial-up subscribers compared to US$1.28b in revenues from online advertising.

Now, I wouldn’t have thought that remaining a dial-up company would have been a very smart corporate strategy, but then again I am that ignorant fool who didn’t know AOL was still (a) still alive and (b) still a dial-up internet provider. Fortunately, Tim Armstrong, AOL’s CEO agrees with me. AOL’s old strategy was to funnel is dial-up subscribers onto its website. Now Armstrong wants to funnel Huffington Post visitors into its other websites.

But can’t you see that its exactly the same gambit that AOL made back in 2000? It paid far too much for Time Warner (which was larger than AOL even in 2000) and its paying far too much for HuffPo now. AOL is using almost half of its cash to purchase HuffPo for US$315m in cash ($300m) and stock ($51m). That US$315m valuation is at 10x 2010A revenues (not profits)  is surprisingly high. For good, stable companies, I would expect a valuation of 10-15x profits, not 10-15x revenues. But HuffPo isn’t exactly a growth business (although 2011E revenues are expected to double 2010 revenues). As the largest online US news provider (ahead even of NYT.com), I can’t really foresee much further organic growth in revenues unless HuffPo expands internationally. Needless to say, international expansion is difficult for any company but especially so for domestic news networks whose business is literally tied to domestic governments. No wonder Ms Huffington and the other HuffPo shareholders demanded cash and not shares.

[The article ends abruptly here]

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2 Comments

  1. Are there many examples of M&A that actually lead to building value?

  2. The research shows that on average, M&A leads to a destruction of shareholder value. What seems to happen is that either M&A leads to a vast decrease in value or a strong increase.

    For example, Google’s acquisition of Youtube (and a lot of other sites) is probably a good example of an increase in value. PwC is another good example of a successful merger.

    I think its all a question of whether anticipated synergies actually arise and whether any unanticipated problems blow up the whole thing.


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